Market Briefing For Monday, December 5
Market psychology has become twisted by virtue of not merely the action that I initially described as rotation (into old-line companies and oils, and out of drugs or techs into infrastructure), but by many repeated oscillations and attempts to reverse the rotation, almost daily at times.
These have been deceptive as generally last week's projected evolution into a near-term 'exhaustion' phase, with some jockeying around both at the end of November and early December. These were anticipated both to result in consolidation or corrections during roughly December's first half (in particular); with suspicion that a year-end rally follows thereafter.
This is actually ongoing despite the impression of a stronger Dow during much of the past week; as that Dow strength has masked an underlying rather aggressive shift my large money managers into 'basic' industries (of the old days in many cases); at the expense of FANG and other tech stocks that most of the pundits pushed investors into at very high levels.
The NASDAQ decline of about 3% this week reflects this sector shift; so if one looks at the broad market, the breadth (Advance/Decline) or other indicators; one senses a declining market in-line with correction, while a look at oil (which we thought would move up almost regardless of funny stuff by OPEC and what I call NOPEC, non-OPEC producers) suggests a stronger market. Actually without the oil strength the S&P and DJIA of course could not have held as well as they have.
Normally this kind of divergence is a warning of more downward actions ahead; and it very likely may be that over the week ahead; especially if we get a retrenching of Oil's gains. Aside that it is simply 'distribution as ongoing, under-cover of some averages suggesting retained strength.
I do not emphasize shorting this market because it's bifurcated; and as most bearish plays would be done in Indexes or surrogates (or the VIX) and as I suggested last week, even in a decline you won't see anything like the downside gains of the Index or upside in VIX, as earlier this year and that's because of the aforementioned rotation.
In sum
We have forecast a bifurcated rotational pause-to-refresh time, as the most likely path for December's first half (roughly); but not deep enough or dramatic enough, or broadly enough, to justify heavily playing to hard for a downside move.
In other words, a rotating decline within an ongoing uptrend; essentially a backing-off and sector reallocation that follows the 'Trump Bump' run; for which we were very enthusiastic (both before and immediately for a down-and-up post-vote move should both Congress and White House results go as they did). This was similar to my call while in England this past summer, that Brexit would result in an initial selling wave followed by new highs for the FTSI (along with eventually lower exchange rates for both the Pound and the Euro to the Dollar).
The difference here would be that it all occurred too darn fast (middle of the night); but the action was what we had in mind figuring many didn't appreciate the significant of a change to a functional government, and a businessman's approach to running the nation. We thought it would be a terrific outcome, regardless of the whining by those who abandoned a key segment of the citizenry; the middle class and working Americans. (I thought the Country could grow going forward either way; but with the 'animal spirits' better enlivened with tax and other plans as outlined.)
I am well aware of the debt and deficit issues we'll face; but I strongly believe that the alternative approach of heavier taxing and making more people be dependent on Government, would result in an even tougher, if not impossible, challenge for our leadership. Simply put, this approach is no assurance. It will have speed bumps along the way but it has better odds of success than pouring more gasoline on the monetary fire which the prior approach of borrowing without really building the nation really would do. In fairness, the republic roadblocks inhibited a lot over years just past; but the proposals and policies that were proposed often were not ideal with respect to empowering people and forward growth.
Thus it was necessary to get Executive and Legislative branches out of the morass, and aligned to end gridlock. This should be potentially good for the Nation, regardless of opinions about any of the major players. Of course, that presumes they behave (as it seems they are) properly, with a focus on business and growth, and not meddle in human rights other than to reinforce and uphold the Constitutional rights of all citizens.
Basically, America is about business. And business is America. Yes for sure there's more; but if you meddle less with people's liberties and lots more focus on education, growth with innovation also; you'll lift not only spirits but profits and prospects, going forward.
There has been an argument that President-Elect Trump shouldn't have nudged United Technologies in the Carrier jobs issue. Balderdash. The Government has done this throughout our history; just maybe subtler at times. The 'stick & carrot' of awareness of Federal funding for projects as well as incentives by reducing taxes (not much really was given but I am thinking the overall tax cuts, if passed, will go far toward repatriating funds and even jobs to the United States) is not new. Even Roosevelt in the heart of the Depression used it to cajole companies into hiring.
So I believe this isn't so much serious 'crony capitalism' that opponents emphasize, or a set-up for many others to blackmail incentives from governments, but rather that doing a properly reformed tax structure will naturally see a trend in the direction of jobs staying here (or returning) without serious interventions being needed by the President or others.
Many challenges lie ahead
Italy's referendum (which may become an anti-Euro situation, which would 'bull' the Dollar anew if that occurs); of course the upcoming likely Fed interest rate hike; actual oil production cuts (they're already wrangling, which isn't a surprise, and there's new less-noticed meetings to codify the actual production levels if they don't balk before even those gatherings in the weeks ahead); and finally risk of some miscalculation in the Middle East (latest speculation I heard is of the Russians not Syrians being the ones who attacked Turkish Army forces inside Syria; though Moscow denies that).
(Also not reported here in the U.S.; the United Nations IS moving back into an area near Golan, which serves as a buffer between Syria and Israel. Right not that's lots more dangerous as ISIS has been infiltrating that region and fired on an Israeli patrol the other day, which was the first 'open battle' between an IDF routine patrol and motorized IS terrorists. The Israelis called-in an airstrike and took-out the terrorists and also leveled a Syrian bunker that had fired a mortar round into Israel. This matters as Israeli is sending a message to both Syria and the IS terrorists that they don't want to get engage in their combat, but will totally destroy anyone who messes with them. To that end, just in case, they're preparing 'commando brigades' to get behind enemy lines should the regional barbarians -any of them- force them to engage.)
Some of the market action has certainly been excessive in big old materials stocks; however some were so low that they're not quite so excessive 'if' one looks out perhaps two years forward. However that is still too far out to discount now; although what's going on remains just as I've said: a 'fundamental shift' in focus and in an American reflation, as well as eventually higher oil prices; and greater growth globally and that's despite the conventional view that U.S. assertiveness will harm all our trading partners.
Daily action
Debates about Cabinet positions; and Wall Street desires (which are more likely to be reformed mightily with this combination); do go to the back-burner in a sense; as building the USA is the prime goal.
We think the President and others proceed on this path; we also believe the stock market will consolidate in reasonable fashion over the week or two ahead, rather than anything terribly dramatic, barring exogenous or other events (such as the Italian referendum effects, or Syrian war).
Weekend (final) MarketCast
2 o'clock balloon (intraday) MarketCast
Disclosure: None.
thanks for sharing